“If you can keep your head when all about you
Are losing theirs and blaming it on you”
The opening stanza of Kipling’s poem about British stoutness is not to say others are blaming but rather an admonition from Notes From Underground about keeping your wits about you and trying to make quality decisions in trying times. In a financial world that is steeped in excess leverage, nanoseconds and algorithmic trading programs ,being a fundamental/technical trader seeking relative value becomes a daunting task. I am not one who favors catching “falling pianos” and have been more content to let trades come to make rather than force the action. As the markets unwind leveraged trades that causes massive selling across all asset classes.
If Turkey is troubled, Syria in flames, China slowing and Brazil troubled, then it is time to disgorge an entire portfolio. Chairman Bernanke, devoid of political analysis in his super computer modeler, makes the bastion of safety and comfort, the U.S. Treasury market, a volatile and turbulent asset class, all because the FED determines that no time like the present to “taper” the QE program. All in all, a toxic potient. IF in this mess we can find some values, WE WILL TRULY KEEPING OUR HEADS.
***One place I find interesting is an old theme of NFU, the Mexican peso. Yes, I am aware that the MP is a very crowded investment and is the mainstay of many investor’s emerging market portfolios. The Mexican peso has declined 18% off its highs made in early May, a precipitous drop indeed. In the same relative period the S&P is down 6 percent. If you think the Mexican story is a U.S. story then the Mexican peso would have to be heavily oversold relative to its value anchor. I believe that the Mexican investment story is far bigger than just the U.S. The current government of President Nieto plans on bringing forth legislation to allow foreign investment into PEMEX for the first time since 1938.
The nationally owned Pemex is in dire need of capital so as to have the investment to search for new oil fields as its current workhorse, CANTARELL, is in decline. Again, 40 percent of the Mexican budget revenue is from Pemex earnings so the need for foreign capital is real. In addition, the Mexican story is not one of 1994, when Mexico was subjected to the “Tequila Crisis,” a weakening currency with a huge amount of debt denominated in an appreciating U.S.DOLLAR. A recent Bloomberg article pointed out that at this juncture Mexico is in a much better position then 1994.
Earlier this year, “Mexico’s government took advantage of lower borrowing … to lock in yields on benchmark bonds as low as 4.48% as it boosted the average local currency debt maturities to a duration of eight and a quarter years, about fourteen times longer than 1994 ….”
In a hat tip to KJM, he noted in a conversation that the PESO/YUAN chart looked very interesting. The YUAN is making all-time HIGHS versus the PESO at a time when the PERMABULLS on U.S. equities are making the case about a re-industrialization boom driving the U.S. market higher. A stronger U.S. feeds into a revitalized Mexico, especially as the Mexican currency in a low inflation global environment makes the Mexican labor market an attractive alternative to China. As Keynes famously said, “Markets can remain irrational much longer then you can remain solvent.” Keynes’s fellow Brit may have retorted, “Yes J.M., IF you can keep your head.” As always, I caution to do your technical analysis to find risk parameters that suit your profile. Preservation of capital is always an important feature of NOTES.
***A quick hitter: ECB President Draghi was on the stump today as he delivered a speech in Berlin and noted that OMT is now even more important “to buy bonds issued by indebted countries’… as we see potential changes in the monetary policy stance, with assorted uncertainty, in other jurisdictions of the global economy.'” As usual, he “stressed that troubled countries could not get help from the bond purchase without committing to reforms.” (AP, David McHugh and Geir Moulson). It seems that President Draghi needs to continue to placate the Germans by insisting there can be no QE without severe conditionalities.
Mr. Draghi, austerity for the sake of financial assistance cannot do the trick without the recipient also depreciating its currency. Otherwise the measures will be half-hearted. The ECB has to be fearful of Dallas Fed President Richard Fisher’s “HERD OF FERAL HOGS” for they will certainly root out the major weaknesses facing the ECB and entire European financial system. Mario Draghi, you have kept your head, but the market will test you to see:
“If you can make one heap of all your winnings
and risk it on one turn of pitch-and-toss”
President Draghi, the world may well demand action on OMT … the forces are building.